logicalthought

Think the U.S. Economy Is Headed Toward Inflation? Think Again

Okay, I will answer several commentators here at once:

De Kirk wrote:
>>Even if the dollars depreciate, the consumer will learn just to live within their means.... Deflation occurs once people start to reduce debts and start saving.<<

Davewmart wrote:
>>One way or another, living standards are going to decline.... Prices will still rise, but won't be matched by pay increases. So you have rising prices but are still in a deflationary environment, not an inflationary one.<<

And "Mr. Big" wrote:
>>...at the end of the day, inflation really is a monetary concept.<<

I think that at the end of the day, we may have both "inflation" and "deflation" at the same time; i.e., "inflation" in dollar-denominated items that are internationally fungible (such as commodities and finished goods that are made using commodities) and "deflation" in domestic services that are non-fungible. So yes, the inflationary component of this is clearly caused by monetary policy (as there's plenty of slack capacity out there and, I think, will continue to be) and the deflationary component (primarily wage pressure and things such as real estate prices in U.S. areas not desirable to foreign buyers) may co-exist with this.

This is why I think the "extend and pretend" policy a lot of banks are following in regard to their underwater loans is doomed to failure; to paraphrase Keans, "the real estate markets will remain depressed longer than those banks can remain solvent."

And as for move4ward's comment about inflation not being a problem here because of dollar-denominated imports from China (via the dollar-linked yuan), if the Chinese continue to link their yuan to the dollar then there could be substantial price increases for the commodity inputs used to manufacture those goods, and those increase will have to be passed along to U.S. consumers. And, on the other hand, if the Chinese revalue their yuan, well, that will mean higher prices, too.

This is why Bernacke and Timmy Boy are shooting themselves in the foot by paying nothing more than lip service to a strong dollar, because it's a strong dollar that will help make life livable for all of the wage deflation we're destined to suffer.

Think the U.S. Economy Is Headed Toward Inflation? Think Again

>>To have high inflation in this country... Either we need to have rising wages... or... some external shock invalidating the profit expectations of firms, leading them to raise prices.<<

What about a declining dollar leading to higher dollar-denominated commodity prices, thus raising food, energy and raw material costs for the U.S. consumer while-- as the author states-- the high unemployment level simultaneously holds down wages? This is a recipe for stagflation and, as I posted elsewhere a week or so ago, could soon bring back that relic from the 1970s known as the "Misery Index":
en.wikipedia.org/wiki/...

Mushroom Cloud Trade Not Working Well

>>What am I looking for to know the Fed is out of rope...(is) when rates rise without tightening from the Fed... At that point, a larger cash position makes more sense.<<

The problem is that when that happens, it will happen EXTREMELY quickly. So, the second that Treasury auction fails, you'd better be in front of a screen and hitting the "sell" button, because a few hours later, the market could be down 5%, and a few days later, it could be down 20%.

<<Right now, you have the Fed and the Chinese working together to make dollars available world wide...<<

Huh? Waht are you talking about re. the Chinese? The Chinese are undoubtedly NOT "working with the Fed" and, in fact, are getting increasingly pissed about what's going on with the dollar.

>>It's why I've been short treasuries... It's not as if the bet has a lot of downside from here.<<

Who the hell knows? Logically, you should be right, but the Japanese drove their 10-year yields down to around 50 basis points (!!!) as recently as 2003 or so.

Could Investors Be Wrong (Again) About Treasury Bonds (TLT)?

Texpat:

This is a fair question, and I will give you an "outlier" of an answer: Yes, I think that Bernacke will (to use your phrase) "have a change of heart", due both to his own introspection and pressure from the rest of the Fed and wiser heads outside of government (but certainly not from the Dems in Congress-- I'm not THAT naive). I really think that he won't want to go down in history as the guy who destroyed the U.S. dollar, and he will thus force the country to accept the delevering pain we should've already started a while ago.

On Jun 23 08:48 AM texpat wrote:

> Before he became Fed chairman, Bernanke was already on record as
> favoring turning up the printing presses to prevent deflation (what
> became called the "helicopter drop"). And the Fed is currently talking
> about QE to buy Treasury debt. Do you think that all of this is misdirection
> or that they're going to have a sudden change of heart?
>
> On Jun 23 07:07 AM logicalthought wrote:

Could Investors Be Wrong (Again) About Treasury Bonds (TLT)?

I'm all for "expecting the unexpected", but under what realistic scenario could U.S. interest rates stay low, no matter how bad the economy is? (And I do think it will continue to be bad.) When you combine the amount of upcoming Fed issuance with the declining demand from foreigners (due to decreasing U.S. imports), it seems to me that rates will have to stay high in order to attract buyers. And if the Fed monetizes the debt instead, rates will soar due to inflationary fears (which is why I think the Fed won't do it). Thus, I think we'll see what is perhaps the worst of all economic worlds: high rates combined with DE-flation, an environment in which cash will truly be king.